Robert E. Cowen

“ Recognition of income would depend upon a finding that Zarin did not have cancellation of indebtedness income solely because his debt was unenforceable. We do not so hold. Although unenforceability is a factor in our analysis, our decision ultimately hinges upon the determination that the "disputed debt" rule applied, or alternatively, that chips are not property within the meaning of I.R.C. section 108. ”

“ Moreover, the debt is frequently incurred to acquire gambling chips, and not money. Although casinos attach a dollar value to each chip, that value, unlike money's, is not beyond dispute, particularly given the illegality of gambling debts in the first place. This proposition is supported by the facts of the present case. Resorts gave Zarin $ 3.4 million dollars of chips in exchange for markers evidencing Zarin's debt. If indeed the only issue was the enforceability of the entire debt, there would have been no settlement. ”

“ To facilitate his gaming activities in Atlantic City, Zarin applied to Resorts International Hotel ("Resorts") for a credit line in June, 1978. Following a credit check, Resorts granted Zarin $ 10,000 of credit. Pursuant to this credit arrangement with Resorts, Zarin could write a check, called a marker, [2] and in return receive chips, which could then be used to gamble at the casino's tables.
Before long, Zarin developed a reputation as an extravagant "high roller" who routinely bet the house maximum while playing craps, his game of choice. ”

“ Therefore, the taxpayer did not have any income from cancellation of indebtedness.
There is little difference between the present case and Sobel. Zarin incurred a $ 3,435,000 debt while gambling at Resorts, but in court, disputed liability on the basis of unenforceability. A settlement of $ 500,000 was eventually agreed upon. It follows from Sobel that the settlement served only to fix the amount of debt. No income was realized or recognized. When Zarin paid the $ 500,000, any tax consequence dissolved. ”

“ The Tax Court denied the motion for reconsideration. By reason of our resolution of this case, we do not need to decide whether the Tax Court abused its discretion in denying Zarin's motion.↑ The Tax Court held that the Commissioner had not met its burden of proving that the debt owed Resorts was enforceable as a matter of state law. Zarin, 92 T.C. at 1090. There was ample evidence to support that finding. In New Jersey, the extension of credit by casinos "to enable [any] person to take part in gaming activity as a player" is limited. ”

“ We reject the Tax Court's rationale. When a debt is unenforceable, it follows that the amount of the debt, and not just the liability thereon, is in dispute. Although a debt may be unenforceable, there still could be some value attached to its worth. This is especially so with regards to gambling debts. In most states, gambling debts are unenforceable, and have "but slight potential. ”

“ Nevertheless, they are often collected, at least in part. For example, Resorts is not a charity; it would not have extended illegal credit to Zarin and others if it did not have some hope of collecting debts incurred pursuant to the grant of credit. ”

“ We do note that Hall relied on Bowers only for the proposition that "'a court need not in every case be oblivious to the net effect of the entire transaction.'" United States v. Hall, 307 F.2d at 242, quoting Bradford v. ”